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BACK IN THE SADDLE: “Together again at last! We’ll have to celebrate this. But how?” After a brief absence, I greet you with one of the first lines of Samuel Beckett’s immortal “Waiting for Godot.” How Beckett’s tramps Vladimir and Estragon celebrated is another, very good, story. How we should celebrate? By sharing the information below. Good to be back, but endless thanks to Silvia Sciorilli Borrelli, Pierre Briançon, and Charles Lee for doing great work in my stead.

BREXIT DEAL I — MEET ‘CANADA PLUS PLUS’: It’s the newish kid on the block of the various potential deals being floated by politicians and business leaders in the U.K. It also happens to be one the best hopes the financial industry has of not having to move thousands and thousands of people out of London. So let’s explore it.

It starts with a free trade agreement, but there’s more: Supporters of this plan say the FTA could look very much like the one the EU and Canada have agreed. With one, crucial, addendum: a bilateral agreement on financial services market access that would go above and beyond what the FTA prescribes.

What would be in it for both sides? For the U.K., that’s easy. A deal that allows London-based firms to retain a substantial form of access to the EU single market would help preserve the City’s primacy as a financial center. For the EU and its member countries, it’s a little more complicated: Insiders suggest that Britain could offer not just to align its rules with EU ones (a stronger version of the “equivalence” concept) but also to cede some of the oversight to EU bodies. For example, the European Banking Authority could retain its powers over U.K. banks, as would the European Securities and Markets Authority (ESMA) with exchanges and so on.

M.E. sideline: “Bottom up” is the operative phrase here. The financial and political types pushing “Canada Plus Plus” hope it will become a viable solution once the Brexit talks get down to the details and the technical experts are charged with finding a creative way of making things work. It’s certainly possible to envisage a bespoke agreement that could be sold as a “win-win” for both sides. The big stumbling block is, of course, freedom of movement. If Theresa May pushes for curbs and the Europeans push back, any precise tailoring of a financial services deal would go to waste. Watch this space.

BREXIT DEAL II — A LONDON ‘CITY STATE?’ POLITICO’s Charlie Cooper and Francesco Guerrera on London’s attempts to stave off Brexit: “Theresa May’s plan for a ‘hard Brexit’ is about to come up against a very large obstacle. It’s big, it’s rich, and it’s used to getting its way. It’s called London.

“The capital’s business leaders and financial giants, worried about the impact tougher immigration controls and departure of the single market could have on their revenues, have identified London Mayor Sadiq Khan as their champion.” Read the full story here: http://politi.co/2dJFp42.

M.E. reality check: The name is Khan. Sadiq Khan. Just like that, London’s business community has found its hero, the city’s Labour mayor. But, unfortunately, we don’t need another hero (this one is for my editor, Charles Lee, who thinks I’m too current with my music choices …). Khan is a big advocate of Brexit not meaning Brexit, but his powers are limited. He won’t, for example, get the “seat at the table” both he and his new friends in the business community are demanding, because Theresa May controls that particular seating arrangement. And the idea of a “London visa” or even a “special working permit” for the capital also sounds far-fetched.

See below for more Brexit coverage, including a revealing survey of what big investors are really worried about.

DRIVING THE DAY: Not much on the economic front other than eurozone industrial production from August, which is expected to have risen 0.2 percent year-on-year.

In the afternoon, Basel Committee on Banking Supervision’s William Coen visits the European Parliament for an “exchange” of views. Later in the day, the minutes of the last meeting of the Federal Reserve’s rate-setting committee will be released. Watch out for difference of opinions on when to raise rates.

STAY IN TOUCH: Thanks to the readers who asked after my health, naturally assuming that I must be sick if I was taking time off from M.E. I’m humbled by your view of my work ethic but, thankfully, I simply took a couple of days off (I’m Italian, remember?). That said, it’s always nice to hear from you. fguerrera@politico.eu and morningexchange@politico.eu. And on Twitter: @guerreraf72

BASEL I — WILL THE EU DIVERGE FROM GLOBAL RULES? POLITICO’s Fiona Maxwell: “EU finance ministers again backed the European Commission position on bank capital rules on Tuesday at a meeting in Luxembourg, the day before EU parliamentarians prepare to meet with the secretary-general of the Basel Committee. The latest Council support follows the strongest declaration yet for backing European banks’ claims that Basel Committee’s proposed rules would devastate lending in the EU economy, made recently by the Commission’s vice president for financial services.” Read the full story here: http://politi.co/2dJd36h, (for Pros)

BASEL II — COMMITTEE TO LOOK AT DELAY IN ACCOUNTING RULES: The Financial Times’ Caroline Binham: “Global standard setters for banks have given a sop to European policy makers amid a broader spat over how tough to make post-crisis financial reforms. The Basel Committee on Banking Supervision proposed on Tuesday for there to be transitional arrangements for lenders before new accounting standards introduced in the wake of the crisis are implemented. In the EU, the rules will take effect in 2018 while in the United States they come into force in 2020.

“BCBS said that it would consult over whether there should be an ‘interim period’ in which banks would be allowed to apply current rules to their calculations around regulatory capital, and whether transitional arrangements are needed, particularly around how credit risk is modelled.” http://on.ft.com/2d5kmr3

COMMISSION BACKS EU-WIDE DEPOSIT INSURANCE SCHEME: In news that will please Matteo Renzi and irritate Angela Merkel and Wolfgang Schäuble. POLITICO’s Fiona Maxwell reports: “Pooling of risk delivers a ‘significantly stronger’ deposit guarantee system than just national schemes, according to the Commission in its analysis of plans for an EU-wide deposit insurance scheme. The Parliament had requested the analysis from the Commission on the European Deposit Insurance Scheme — a proposal which has been the subject of controversy among member countries, led by Germany, given the ‘moral hazard’ of so-called risk sharing (meaning that richer countries might end paying for the sins of banks in poorer countries).

“Some countries have had their doubts on its viability, but the Commission says the fund would be in a good position to deal with potential spillover effects in the case of a bank default, and that bank level contributions to the fund, proportionate to how risky each lender is, would ‘reduce incentives for banks to misbehave.’

“Work is currently under way in the Council to go through the proposals, line by line, and find a compromise between countries, like Italy, that feel that EDIS is a cornerstone of the EU banking union and those, like Germany, that are deeply suspicious of the idea. The Council will decide at the end of the year whether work has progressed enough to continue discussions at a political level.”

GREECE — WILL THE IMF PARTICIPATE IN THE LATEST RESCUE PLAN? Yes, says Eurasia’s Mujtaba Rahman in his latest note but that’s not good news for the EU. “A deal that keeps the IMF financially involved in Greece’s bailout and advances debt relief for Athens is still our base-case, though a close call,” he writes. “A new IMF instrument that allows the Fund to set policy conditions without providing financing will otherwise be the likely compromise; this will represent the worst of all worlds for the Europeans, allowing the IMF to still be involved while criticising the bailout from the outside.”

CRISIS ALERT — SOVEREIGN WEALTH FUNDS LOOK AT SECURITIES LENDING: This is somewhat worrying news for those who remember the financial crisis. A new report by the think tank Official Monetary and Financial Institutions Forum and BNY Mellon, the big U.S. bank, found that sovereign wealth funds are willing to allocate “10 percent to 15 percent of their balance sheets for securities-lending activities, with some reporting they are considering up to 60 percent.” I have three problems with this, but first …

What is securities lending? A fairly plain-vanilla financial transaction where one market player, usually a hedge fund or a bank’s trading desk, borrows, say, a stock from another participant. In exchange, the lender receives collateral, usually in the form of cash. A lot of “shorting” in financial markets takes place with lent securities, for example.

M.E. first problem with this: This practice can be risky. Just ask AIG, whose near-collapse in 2008 was partly caused by its securities-lending operations. That business lost the U.S. insurer a cool $21 billion (€19 billion), according to Robert McDonald and Anna Paulson of Kellogg School of Management at Northwestern University. That’s because AIG took the cash it got as collateral and put it in risky, illiquid investments. When the hedge funds returned the borrowed securities and asked AIG for the money back, they were unable to get it.

M.E. second problem with this: It’s unclear that more securities lending will “help overcome constraints on global liquidity,” as the report claims. It’s true that some market participants complain that some stocks and bonds are difficult to find when needed, but it’s also not clear whether sovereign wealth funds would be willing to lend those out rather than very common securities like U.S. Treasuries.

M.E. third problem with this: The press release presenting the report fails to mention that BNY Mellon is a big player in providing finance for — yes, you guessed it — securities lending as you can see here: http://bny.mn/2dJGhFV. It would have been only fair to point that out, so readers are aware.

MORE BREXIT:

Global investors not worried about immigration curbs: FTI Consulting asked 154 large pension funds and the like, with with over $10 trillion assets under management about their hopes and fears, post-Brexit. One interesting response: Eight out of 10 believe there will be curbs on immigration, but less than half are concerned about it. Also interesting, the investors are divided almost 50-50 on whether passporting rights will remain, a much more optimistic view than the City of London.

Dan Healy, FTI’s head of research: “Investors are divided on whether restrictions on immigration between the EU and U.K. is a concern, but they’re more united on this being inevitable. However, what’s particularly concerning them is whether financial institutions will have access to the EU via a financial passport.”

David Davis warns Treasury not to interfere in Brexit negotiations: The Times’ Steven Swinford: “It today emerged that leaked draft Cabinet papers warned that if Britain leaves the Single Market without a new deal it will cost the Treasury £66 billion in tax revenues. Mr Davis, the Secretary of State for Exiting the European Union, is understood to believe that the warning is part of a ‘succession of treasury briefings that are damaging negotiations.'” http://bit.ly/2dujRD4

The message came a little late for some: Raoul Ruparel, hired by Davis to provide expertise on Brexit, said before he was appointed to his new role that leaving the customs union would lead to a “permanent cost” of more than £25 billion a year, reducing Britain’s GDP by between 1 and 1.2 percent in the long term, the Guardian reports. EU countries in the customs union negotiate trade deals and set common external tariffs. http://bit.ly/2e5mdIs

New BoE rate setter warns about inflation, lower growth: A topical chat on another bleak day for the pound, which completed the worst four-day performance since the June 23 referendum, according to The Guardian.

POLITICO’s Silvia Sciorilli Borrelli listened to new BoE member Michael Saunders: “At his appointment hearing on Tuesday, the newest Bank of England Monetary Policy Committee external member Michael Saunders told the U.K. Treasury Select Committee the Brexit vote is likely to trigger a period of lower growth and higher inflation, which will require the central bank’s policymakers to consider appropriate trade-offs between the speed at which they will seek the 2 percent inflation target and output.

“‘With the added boost to inflation (and growth) from recent sterling weakness, the overall effect of EU exit on CPI inflation over the next 2-3 years is likely to be upwards. The persistence of any such inflation blip would depend in particular on whether there is a knock-on boost to inflation expectations and pay growth,’ Saunders said.

“‘In this regard, I would expect the MPC to tolerate a modest currency-driven inflation overshoot,’ he added, noting that the situation may become more complicated if the uncertainty around leaving the EU and the weakness of sterling persists. Meanwhile, he also said he would expect the pound’s value to fall further.

“However, the positive thing about the plummeting U.K. currency, according to Saunders, is that a weaker pound will allow to expand tradable sectors like manufacturing, sustaining the rebalancing of the economy away from EU-centered trade, especially in financial and business services.”

Silvia’s sideline: The former Citigroup executive last week said he was more optimistic than his MPC colleagues about the U.K.’s economic growth, but the statements made before the influential MPs seem quite in line with the other eight policymakers’ stances.

Of course, the falling pound will sustain exports, but what he’s basically saying here is that households will have to pay more for imported goods and because of this, inflation is likely to surpass the 2 percent target. Now, that would normally trigger a raise in interest rates, but Saunders says in this case it would be a mistake. The MPC will present its next growth and inflation forecast at its meeting on November 3 and three weeks later, Chancellor Philip Hammond will deliver his first budget, which is likely to contain measures to boost the economy.

According to Saunders, fiscal policy impacts monetary policy and the BoE isn’t out of ammunition: “If we were, I’d say so,” he told the Treasury committee. Probably wise to brace for another interest rate cut in December or early next year.

VTB likely to move out of London … The Russian state-controlled bank has become the first lender to publicly say it is off, according to the Financial Times’ Martin Arnold: http://on.ft.com/2d5hRoL

… Morgan Stanley also hints at partial move: Robert Rooney, chief executive of Morgan Stanley International, said the U.S. bank “will have to do a lot of things that we do today from London somewhere inside the EU 27,” if Britain loses access to the single market. Financial News’ Lucy Burton and Fareed Sahloul have the story: http://bit.ly/2d5iqPl

… while Virgin Money is hiring less: POLITICO’s Charlie Cooper reports that Jayne-Anne Gadhia told a roundtable in London that the consumer finance firm has “held down recruitment” to keep a lid on costs due to the uncertainty around Brexit. She expected other firms to do the same.

UK — PENSION REFORMS WILL DECREASE RETIREMENT SAVINGS: Pension reforms that make saving for retirement less attractive will create a £5 billion yearly hole in public finances, according to the U.K.’s Office for Budget Responsibility. http://bit.ly/2e0aRpU

DEUTSCHE WATCH — PRIVATE BOND RAISING LATEST: “Less than a week after raising $3 billion in a private debt sale, Deutsche Bank AG returned for another $1.5 billion, offering yields that were more than twice what it paid to borrow a year ago,” Bloomberg reports. “The German lender issued the debt to mostly the same investors who bought last week’s offering, according to a person with knowledge of the matter. But it paid a slightly smaller premium this time around, with the deal priced at 290 basis points above borrowing benchmarks.” http://bloom.bg/2d6pBXs

OIL — THE CHALLENGE OF CUTTING PRODUCTION: The Wall Street Journal’s Benoit Faucon: “OPEC pumped a record amount of oil last month, the International Energy Agency said Tuesday, and officials from three of the cartel’s member countries say they plan to raise output in the near future. The increased production shows how much work the Organization of the Petroleum Exporting Countries must do to achieve production cuts it agreed to last month in an attempt to end a crude glut that has depressed prices for two years.” http://on.wsj.com/2dZrsu1

US CORNER:

Big US banks restructure to appease regulators: POLITICO’s Victoria Guida: “The biggest U.S. banks, under the gun to prove they can safely unwind themselves during bankruptcy, are being pushed by the government to undergo significant structural changes, an examination of their latest updated ‘living wills’ shows. Now, the so-called systemically important banks are waiting to find out if those changes are enough to win the approval of their chief regulators, the Federal Reserve and the Federal Deposit Insurance Corp.”

SEC sets new enforcement record: POLITICO’s Patrick Temple-West: “The Securities and Exchange Commission filed a record number of enforcement actions for the third year in a row, but the dollar amount it collected in sanctions dipped to about $4 billion, the SEC said today in announcing its annual enforcement statistics. For the 12 months ended September 30, the SEC had 868 enforcement actions, up from 807 in 2015 and 755 in 2014.”